Understanding Accounting for New Business Start Up Costs

Accounting for new business start up costs is needed to estimate the expenditure of money for the business. Starting from managing business permits and renting premises to renovations and promotions certainly require recorded expenses. To help future planning and decision making are smooth, here are some tips that you can pay attention to.

Tips for Accounting for New Business Start Up Costs

1. Separate Personal and Business Expenses

In accounting to prepare the start-up business costs, it’s important to separate business and personal expenses. Avoid mixing the two because this will risk the use of money carelessly and not being recorded. Accounting records to calculate business profits and losses will be messed up by mixing the two types of finances.

Not to mention tax reporting which should only take into account business accounting and not include personal financial records. If it’s already a legal entity, open a new bank account in the name of your company. From the start, personal and business money must be separated and don’t start it in the middle of the business.

2. Identify and Classify Start Up Costs

As cash flow starts, you will need it to pay for operating expenses and receipts should be kept. Any costs related to the new business should be kept properly because these will be needed for financial review processes. Purchase orders as well as small business start-up costs and sales contracts should also all be documented for tax audits.

Start up costs for a business should be classified as well aside from the identification of the operating costs types. Fixed costs and variable costs should be separated because fixed costs won’t change but variable costs go up and down. In order to have more accurate financial records, separating the two is highly recommended.

(Read more: Types of Correction of Errors in Accounting)

3. Use Accounting Software

In accounting in order to record the finances of a new business, it’s important to consider using accounting software. Invest in accounting software to make everything efficient, especially in simplifying cost recording. Even the accuracy of financial reports is more reliable than if you do it manually with the risk of errors.

4. Establish the Amortization Period

In this way, you need to determine how long to divide a cost and record it as an expense. There’s a certain time period for this, such as purchasing expensive equipment for business purposes. Recording costs can be divided into several years in the future because this tool will definitely be for long-term use.

Accounting for startup costs can be done by dividing the burden instead of recording the cost in the first month. This is very helpful for businesses so that they aren’t burdened with large expenses in one purchase. Distribute costs over a longer period with an amortization period of around 4-5 years for relief.

5. Choose an Accounting Method

Another important thing is choosing an accounting method for recording expenses and income when a transaction occurs. This choice affects your business’s profit and loss report and how you manage your cash flow as a whole. In accounting, there are two fairly well-known and widely used methods, namely accrual accounting and cash accounting.

The accrual accounting method is a method of recording income and expenses when a transaction occurs. Late payments aren’t a problem because when the money actually comes in or goes out doesn’t matter. Meanwhile, the cash accounting method is the opposite of accrual accounting, recording income and expenses when the transaction is happening.

6. Plan a Budget for Purchasing Goods and Equipment

Accounting for new business start up costs example also requires budget planning for every purchase of business needs. Every expense must be recorded and make sure the budget is clear in order to run operations smoothly. The budget should be prepared according to business capacity so that it doesn’t end in waste that harms the business.

7. Prepare Payroll

You also need to start planning the preparation of payroll for your business employees, either monthly or weekly. This includes basic salary and allowances, including overtime and allowances. Calculating total payments to employees is useful so that employees are paid on time according to applicable regulations.

Accounting for new business start up costs not only helps to know the operational costs of the business. This is important to optimize expenses and set the right price to generate profits. That way you will be tax compliant and make the right decisions for the business.